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Terms-Of-Trade Fluctuations And Their Implications For Exchange- Rate Coordination In Mercosur

Author

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  • Nelson H. Barbosa-Filho

    (Institute of Economics, Federal University of Rio de Janeiro)

Abstract

This paper presents the correlation between the annual fluctuations of the terms of trade of Brazil, Argentina, Uruguay and Paraguay. The period under analysis is 1980-2001 and the main findings are that the four countries have a high to moderate synchronization of their export prices, a moderate to low synchronization of their import prices, and a low synchronization of their terms of trade. The small positive correlation between the growth rates of the terms of trade of Brazil and Argentina (0.24) support exchange rate coordination between the two countries, provided that their bilateral real exchange rate is allowed to fluctuate temporarily to accommodate possible differences between the intensity of shocks across them. For instance, given an adverse shock to Brazil, both the Brazilian and Argentine real exchange rates against the rest of the world (domestic good per unit of foreign good) should increase to avoid a reduction, or smooth the variation, of their trade balances, but the Argentine currency should appreciate against the Brazilian currency in real terms because Argentina tends to be less affected by the shock. The observed correlations indicate that, through a joint and flexible managed float of their currencies, Argentina and Brazil may be able to share the benefits and costs of terms-of-trade shocks without imposing major macroeconomic disruptions on each other. In such an arrangement and also based on the observed correlations, Uruguay may either follow Argentina, when the terms-of-trade shock is more intense to Brazil, or do nothing, when the shock is more intense to Argentina. In contrast, Paraguay should follow Brazil, when the terms- of-trade shock is more intense to Argentina, or do nothing, when the shock is more intense to Brazil. Because of the low correlation between the terms-of-trade fluctuations of Brazil and Argentina, the best form of exchange-rate coordination for the near future seems to be a Mercosur version of the European Monetary System of 1979-98, that is, a wide interval of fluctuation for the regional currencies around a common and competitive real exchange rate against the rest of the world.

Suggested Citation

  • Nelson H. Barbosa-Filho, 2005. "Terms-Of-Trade Fluctuations And Their Implications For Exchange- Rate Coordination In Mercosur," International Trade 0503002, University Library of Munich, Germany, revised 22 Mar 2005.
    • Handle: RePEc:wpa:wuwpit:0503002
    Note: Type of Document - pdf; pages: 26
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    References listed on IDEAS

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    1. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-1025, July.
    2. Barry Eichengreen, 1998. "Does Mercosur Need a Single Currency," NBER Working Papers 6821, National Bureau of Economic Research, Inc.
    3. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-validating optimum currency areas," Staff Reports 152, Federal Reserve Bank of New York.
    4. Nelson H. Barbosa-Filho, 2005. "Trends And Fluctuations In Brazilian And Argentine Trade Flows," International Trade 0503001, University Library of Munich, Germany.
    5. Nelson H. Barbosa-Filho, 2001. "The balance-of-payments constraint:from balanced trade to sustainable debt," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 381-400.
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    Cited by:

    1. Nelson H. Barbosa-Filho, 2005. "Trends And Fluctuations In Brazilian And Argentine Trade Flows," International Trade 0503001, University Library of Munich, Germany.

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    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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